Equity

Question 1

Rights of shareholders

Answer 1

Voting, Sharing in profits (aka dividends), preemptive right (maintain ownership %), liquidation rights

Question 2

redeemable preferred stock

Answer 2

May require redemption at specified date and specified price or at option of shareholder. Considered debt, reported at fair value and dividends recorded as interest.

Question 3

Treasury stock purchase

Answer 3

reduces both cash and owners equity. Increases EPS. May decrease retained earnings, never increases.

Question 4

Treasury stock cost method

Answer 4

Issued higher than bought, credit paid in capital. Issued lower than bought, debit paid in capital until exhausted, then retained earnings.

Question 5

Treasury stock par method

Answer 5

Bought higher than issued, debit paid in capital. Bought lower than issued, credit paid in capital.

Question 6

Treasury Stock - financial statements?

Answer 6

This doesn’t show on the income statement.

Question 7

Reissuance of treasury stock

Answer 7

no gain

Question 8

Par Value Method 
Stock issued > par
Repurchased < issued > par
Repurchased stock retired
What is affect on: Net common stock, paid in capital and retained earnings

Answer 8

Decrease
Decrease
Decrease

There is now less common stock outstanding. It would reduced the paid in capital account since the purchase was for more than the issue price. The funds to purchase would have come from retained earnings.

Question 9

Cost vs. Par method
Repurchase > par < issue
Effect on Additional Paid in Cap and Retained Earnings

Answer 9

Cost method uses Contra OE (treasury stock - debited for repurchase cost) account to cover the difference between issue price and repurchase price. This does not affect retained earnings or paid in cap.

Par method would debit treasury stock account at par value. Decrease paid in cap to extinguishment. Since less was paid to repurchase than original issue, the retained earnings account is unaffected.

Question 10

Effect on retained earnings and net income from stock repurchases.

Answer 10

Retained earnings can never be increased through transactions with owners.

Additionally, net income is not effected by these purchases.

Question 11

Journal entries Par Value

Stock issue, repurchase and reissue

Answer 11

Db Cash shares issued * iss $
Cr Common Stock (shrs * par)
Cr Add PICap (shrs (iss $-par))

Db T Stock (shrs * par)
Db Add PICap (shrs (iss $ - par))
Db Retained Ern (shrs (pur $ - iss $)
Cr Cash (shrs * pur $)

Db Cash (shrs * new iss $)
Cr T Stock (shrs * par)
Cr Add PICap (shrs (new iss $ - par))

Question 12

Journal entries Cost Value

repurchase and reissue

Answer 12

Db T Stock (shrs * pur $)
  Cr Chas (shrs * pur $)

Db Cash (shrs * new iss $)
Cr T Stock (shrs * cost $)
Cr PIC T Stock (shrs *(new iss - cost)

If PIC is tapped out, then you’ll credit retained earnings for remainder.

Question 13

Liquidating dividends

Answer 13

Return OF capital not ON capital

Reduces contributed capital instead of retained earnings

Question 14

Property dividend

Answer 14

Market value of asset at date of declaration. Normal gain on disposal of asset.

Question 15

Scrip Dividend

Answer 15

Note form with interest until cash is paid. Recognize accrued interest as liability until paid.

Question 16

Small stock dividend effect on retained earnings

Answer 16

Decreases - remember, stock dividends move assets from retained earnings to paid in capital. These are capitalized at the market value of the stock on dec date.

Question 17

Cash dividend effects on working capital

Answer 17

On dec date, retained earnings are reduced. Working capital is current assets - current liabilities. Dividends payable is a current liability. The payment of a dividend does not effect working capital, because it hit cash (current asset) and dividend payable (current liability) at the same time.

Question 18

Accrued dividends

Answer 18

Are not recorded as a liability until declared, but they must be disclosed.

Question 19

Stock dividends

Answer 19

Increase shares outstanding, but do not change owners equity - does reduce RE. Thus decreasing EPS but maintaining % ownership. Remember, does not cause liability or affect WC. These are not treated as revenue to receiver. Increases contributed capital by capitalizing retained earnings.

Question 20

Large Stock dividends

Answer 20

Capitalized at par value instead of market. Greater than 20-25% of shares outstanding.

If treated as a split, Paid in Cap is credited instead of RE.

Question 21

Stock splits

Answer 21

no journal entry

Does not affect RE or Common Stock account

Question 22

Dividend order of priority for payment

Answer 22

1. Preferred in arrears
2. Preferred current
3. Common = same % as preferred * shares outstanding
4. Preferred additional %
5. Common remaining

If there isn’t enough after the common to distribute the remainder to both common and preferred at the same % then allocate by each classes % of total par value.

Question 23

Preferred not fully participating

Answer 23

The percentage given is a percentage of total preferred par value, not a percentage of the dividend.

Question 24

Retained earnings

Answer 24

Income-dividends+/1 other adjustments = retained earnings

Rev-Exp + previous RE = RE (pre-tax)

Question 25

Stock right issuances affect on owners equity

Answer 25

No effect on OE until rights are exercised. When exercised, RE not affected, but additional paid in cap will increase as long as rights’ exercise price is above par.

Question 26

Use of APIC when T shares reissued/purchases:

Increase contributed cap from T stock

Answer 26

Par- Purchase < issue $

Cost - Reissue > cost

Question 27

Use of APIC when T shares reissued/purchases:

Decrease contributed cap from T stock

Answer 27

Par - Purchase > issue $

Cost - Reissue < cost

Question 28

Scrip Div J/E

Answer 28

At Dec:
Deb RE
Cr div payable

At payment:
Deb div payable
Deb interest exp
Cr Cash

Question 29

Stock Right - J/Es

Answer 29

At issue:
no entry
At exercise: normal issue entry
If lapse - no entry

Question 30

Retained earnings statement

Answer 30

R/E for year ending
Beg RE
Prior period adj +/-
Change in Acct adj +/-
Restated balance
\+/- NI
- cash & property dividends declared
- stock dividends
= R/E year end

Footnote to disclose appropriations/restrictions.

Question 31

BV

Answer 31

= (Total OE - preferred stock claims)/common outstanding

= (common stock equity)/(Ending common outstanding)

Question 31

Quasi Reorg

Answer 31

Eliminates negative RE

1) Update overstated asset values against RE
2) Use contributed cap to absorb all or part of RE deficit
3) Reduce the common stock and par value, if necessary

Zero retained earnings, reduced assets and contributed capital. Remember, this is an increase in retained earnings from negative to zero. Decreases owners equity.

Question 32

Requirements of Quasi Reorg

Answer 32

Shareholder approval, RE balance must be zero after, no contributed cap account can have a negative balance, assets must be written down to mkt, RE must be dated 3-10 years after.

Question 33

Quasi Reorg J/E

Answer 33

1 - Write down assets
Deb RE
Cr Operational asets

2 - Close PIC to absorb RE deficit

Db APIC
Cr RE

3. Reduce common stock for the rest
   Db Stock
   Cr RE

New par value = new stock balance/shares outstanding